The Financial Supervisory Authority authorises Kaupskil ehf. to acquire a qualifying holding in Arion Bank hf.

18.1.2010

The Financial Supervisory Authority (FME) has authorised Kaupskil ehf. to acquire a qualifying holding in Arion Bank hf. (Arion) on behalf of Kaupthing Bank hf. (Kaupthing). The permission is granted on the basis of a 3 September 2009 agreement between Kaupthing and the Icelandic Ministry of Finance, authorising Kaupthing to acquire an 87% holding in Arion upon meeting specified conditions.

The FME had found Kaupthing, which is in moratorium and undergoing winding-up proceedings, ineligible to own a qualifying holding in a financial undertaking. The FME noted, however, that because of the extraordinary circumstances leading up to the agreement, and as the agreement represents a concurrence of opinion between the parties concerning Arion operations, it would be possible to investigate whether the applicant could take adequate measures to limit detrimental effects of the ownership; cf. Article 43 of the Act on Financial Undertakings, no. 161/2002. The FME’s decision was to grant permission conditional upon decisive measures pertaining to the financial strength of the applicant, the ownership of the bank, supervisory interests, and the owners’ objectives.

The applicant’s financial strength shall be ensured with access to specific minimum liquidity, which creates a pool that can be utilised to increase Arion’s share capital should the bank encounter severe operational difficulties. The amount of the liquidity base was assessed by Arion at the behest of the FME on the basis of a consistent methodology developed within the framework of the FME’s financial and operational survey of the new banks in May 2009.

The bank’s ownership shall be in the hands of a separate subsidiary of Kaupthing, i.e. Kaupskil, which is governed by a board of directors with the majority consisting of members independent of Kaupthing, members representing large creditors and Arion itself. The Kaupthing Resolution Committee has the option of appointing one representative to the three-member board of directors of Kaupskil, while the other two (including the chairman) must be independent. The nomination of all members to the board is subject to the FME’s approval. Members of the board of directors must meet the FME qualification requirements, including those pertaining to financial knowledge and experience of financial operations.

The board of directors of Kaupskil exercises Kaupthing’s voting rights in Arion and appoints the bank’s board members. The FME also stipulates that only one of the members of the bank’s board may represent the Resolution Committee, while the others (including the chairman) shall be independent. This means that board members may not represent individual owners or creditors, nor may they be bound to them or to the bank itself through any type of special interests. According to a special representation agreement between Kaupskil and Kaupthing, Kaupthing agrees to respect the independence of the board of directors of the former company and its duty to promote sound and solid financial operations at Arion free of external intervention. The board of directors of  Kaupskil is required to report to the FME on the implementation of this policy on a quarterly basis.

In order to facilitate supervision, Kaupskil is required to transfer the ownership of all  financial and insurance subsidiaries to a single parent company if  the FME considers such a transfer necessary.

The owners’ aims and objectives are restricted through specified requirements for transactions with related parties, dividend payments from Arion, and the sale of Arion shares over the next three years. Kaupthing is thereby required to notify the FME in advance of a proposed transfer of ownership of shares in Arion or Kaupskil. Upon receipt of such a notification, the FME will carry out a new eligibility assessment of the prospective owners if the change of ownership affects the board of directors of of the bank.

The FME has previously acquainted the three new banks with its supervisory requirements, which are based on a thorough assessment, conducted in May 2009, of the banks’ operability in terms of asset composition, funding and the economic prospects. The requirements entail a minimum capital adequacy ratio of 16% instead of the previous 8%, the ability to pass a new stress test assuming adverse economic developments for a longer period than generally expected, and more stringent liquidity requirements than imposed earlier. In addition, the new banks’ operating licences are conditional upon their implementing a detailed action plan for improved risk management and corporate governance.

Further information can be obtained from Sigurdur G. Valgeirsson, sgv@fme.is, at tel: +354 525-2700, and mobile phone: +354 840-3861.

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